In an old letter to clients, Tweedy Browne’s managers once stated that investors should be prepared to hold on to an undervalued stock for at least five years in expectation of the stock reaching fair value. Certainly, you can make the case that stocks can remain cheap for ten years or longer—Abbott Labs, Altria, and even Johnson & Johnson have proven that at different points in the past fifteen years. The only additional counsel given by Tweedy Browne is that the longer a stock remains undervalued after the five-year mark, the more likely it is that an investor is wrong about the valuation.
I don’t share the Tweedy Browne view, even though I think it contains some truth. I would modify their guidance to this rule as follows: Unless you can clearly articulate a reason based on facts and probable inferences that explain why a stock continues to be undervalued, … Read the rest of this article!
I’ve been digging through the financial commentary archives of The Wall Street Journal and The New York Times to compare the tone of investment commentary in the late 1990s to the financial news in the immediate aftermath of 1987’s Black Monday in which the value of the Dow Jones dropped by 22% in a single day.
It leaves an impression to see how quickly investor attitudes changed in under ten regarding the same exact companies. On October 20th, 1987, few people were talking about the inherent quality of enterprises like Coca-Cola, Colgate-Palmolive, and Johnson & Johnson, which had been paying out annual dividend increases of almost thirty years by that time. And had been reporting steadily growing profits as well. No one cared.
Just about all common sense was abandoned. The initial prints from The Wall Street Journal and The New York Times compared the fall to the … Read the rest of this article!
Hershey stock has come down 15% since the Christmastime period when I wrote about it being overvalued. The price currently sits at $93 per share (down from the January high of $111). I would classify the current price as high end of fair value. Many people will look to the 2.3% dividend yield and conclude that it is too low to meet their needs.
I certainly get that. If you have a plan to live off dividend income within the next ten years, you are going to receive much higher checks if you buy Chevron at $105 per share, lock in a starting yield of 4%, and reinvest those dividend payments until the time comes when you need the cash.
But, over super long periods of time, companies like Hershey will have the best dividend growth rates of all because people eat chocolate in bad times, ordinary times, and good … Read the rest of this article!
In Grinding It Out, the story of McDonald’s, Ray Kroc explained the financial engineering that drove the company to prosperity in its early days: “The formation of Franchise Realty Corporation, was to my mind, a stroke of financial genius. Franchise Realty was the supreme example of a guy putting his money where his mouth is. We started Franchise Realty Corporation with $1,000 paid-in capital, and Harry parlayed that cash investment into something like $170 million worth of real estate. His idea, simply put, was that we would induce a property owner to lease us his land on a subordinated basis. That is, he would take back a second mortgage so that we could go to a lending institution (in the early days it was a bank) and arrange a first mortgage on the building; the landlord would subordinate his land to the building. I must admit that I was … Read the rest of this article!
Between 2011 and 2015, Procter & Gamble raised its dividend from $1.97 per share to $2.65 per share. During these four years, each share of P&G that got purchased at $60 in 2011 paid out $11.50 in cumulative dividends if you forward count the September and December payments. At an average reinvestment price of $68.23 over the past four years, and assuming the final two payments get reinvested at the current market prices, an investor would have created 0.168 shares of Procter & Gamble over the past four years just by making a singular decision in 2011 and checking off the reinvest box.
I mention this because the past four years have been nothing great for Procter & Gamble. In fact, you could argue that it has been one of the worst relative stretches in the company’s history because it has only grown revenues by 2.5% annually over the past … Read the rest of this article!